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A Generous Gesture: The Russian Government Moves to Prop-Up Domestic Automakers As WTO Accession Becomes Likely

Image of Robotic Assembly of Car in Gaz Group FactoryTaking time off from the festivities marking the country's Day of National Unity, Russia's ruling tandem stopped by at Oleg Deripaska's automaker GAZ Group in Nizhny Novgorod on Friday, bearing a generous gift. For thousands of GAZ autoworkers and their families, the surprise gift, which turned out to be a credit line worth 38 billion rubles ($1.2 billion), could not have come at a better time. Prior to their meeting with the autoworkers, Russian President Dmitry Medvedev and Prime Minister Vladimir Putin toured the GAZ plant where the first Skoda Yeti models had just rolled off the assembly line. "It's customary to give gifts on holidays, and Dmitry Anatolyevich (Medvedev) and I arrived with a gift," Putin said. "Our leading state-owned bank, VTB Group, and GAZ reached a final agreement yesterday, [and] will today, right now, sign an agreement to provide a loan worth 38 billion rubles to GAZ." The bank loan would help create "conditions for a sustained, effective growth of your enterprise," said the prime minister, who has been widely credited with government-aided turnaround in the automobile industry.

The GAZ Group, which prides itself as Russia's largest commercial vehicle maker, was one of the hardest hit Russian automakers when the global recession was at its peak in 2008 to 2009. Its plants were hit by production disruption in the immediate aftermath of the crisis, as GAZ found itself locked down in months of protracted wrangling over debt restructuring with both Russian and international lenders. By December last year, the group has racked up a total debt exceeding 43 billion rubles ($1.4 billion), 38 billion of which was a syndicated loan from 18 banks, including Sberbank, VTB, Absolute Bank, Alfa Bank and Raiffeisenbank, Vedomosti reported.

Along with Russia's flagship carmaker AvtoVAZ, the GAZ Group had managed to stay afloat thanks to the government-sponsored cash-for-clunkers program. During a visit to the plant in December, Putin reminded workers that the government already spent 44 billion rubles ($1.47 billion) in 2010 to "stimulate" the industry as part of the country's cash-for-clunkers program, with about eight billion rubles ($262 million) allocated to boost the GAZ Group alone.

With the latest credit line, however, the Russian prime minister was not only making good on his oft-repeated promise to support the domestic auto industry by stimulating production and boosting sales. Russia's auto sector employs over a million workers, itself a sizeable electoral constituency, not counting their dependants. GAZ alone employed 89,000 workers before the crisis and analysts said the company still has a hard-to-ignore headcount of around 57,000 on its payroll. For a government facing parliamentary elections in December, Friday's generous gesture might not have been completely coincidental.

Other analysts have described the government's loan package as a "pre-emptive move" designed to guarantee the domestic auto industry a soft landing into the World Trade Organization. Industry leaders have long suggested that the domestic automotive industry would be crushed by floods of imported cars when and if Russia joins the global trade body. Russia's inchoate domestic auto industry, which has been evolving behind high tariff walls, is also expected to be rattled by a mandatory reduction on import duties for cars when the country joins the world trade body.

But whatever the government motivation, the good news, analysts say, is that GAZ has retooled. The company has been turning to foreign partners lately for the know-how to help it gain market share and produce vehicles capable of competing with Western brands. GAZ Group teamed up with Volkswagen Group Rus in February to produce more than 100,000 Volkswagen and Skoda cars annually at the truck maker facilities in Nizhny Novgorod. U.S. carmaker General Motors joined the queue in February, announcing plans to make 30,000 of its Chevrolet cars at GAZ's plant to boost its local presence in the fast-growing market. Earlier, in December, GAZ Group said it has agreed with Daimler, the world's biggest truck manufacturer, to assemble up to 60,000 Mercedes Sprinter vans in Russia.

The truck and bus maker has also considered forming an alliance closer to home with its counterparts in Belarus and Ukraine to expand its sphere of sales and strengthen its domestic market share. The company announced in February that it was looking at a deal with Belorussian MAZ (Minsk Automotive Plant) and/or Ukrainian KrAZ (Kremenchug Automotive plant).

GAZ Group CEO Bo Andersson said Friday that GAZ will roll out 105,000 various vehicle models this year, including new models of light trucks like GAZelle, GAZon and GAZ-3308 Sadko. "This is 33 percent more than in 2010," Andersson said. "An average worker's salary has gone up 40 percent since last year, reaching 26,000 rubles ($867) as of October this year."

However, the company is not out of the woods yet. The automaker would only pay 1.6 billion rubles ($53 million) in bonuses this year, 25 percent less than it paid last year, Andersson said, stressing that 70 percent of the bonuses will go to workers, while top managers will receive 30 percent. The company hopes to rake in around 70 billion rubles from the sale of its yet-to-be-produced models of low-floor transit buses in 2012, as well as from new-generation light commercial vehicle GAZelle-Next, which could leave the conveyors in 2013.


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